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Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data

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  • Almut Balleer
  • Marvin Noeller

Abstract

Using firm-level survey data from Germany, this paper asks how do supply constraints propagate monetary policy shocks? To answer this question, we first offer a general discussion on the measurement of supply constraints. We show that capacity utilization, a widely accepted measure of bottlenecks and slack, is only an imperfect measure for supply constraints as a whole. Consequently, we distinguish between input and capacity constraints and show that this distinction is crucial to understand the propagation of monetary policy in the presence of supply constraints: the probability to increase prices rises sharply for input constraint firms in response to an expansionary monetary policy shock, independent of their level of capacity utilization. This result challenges a recent literature that argues that capacity utilization is a sufficient statistic to understand the propagation of aggregate shocks in the presence of production limitations.

Suggested Citation

  • Almut Balleer & Marvin Noeller, 2023. "Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data," CESifo Working Paper Series 10261, CESifo.
    • Handle: RePEc:ces:ceswps:_10261
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    References listed on IDEAS

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    Cited by:

    1. Nils Gornemann & Sebastian Hildebrand & Keith Kuester, 2022. "Limited Energy Supply, Sunspots, and Monetary Policy," ECONtribute Discussion Papers Series 215, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    supply constraints; capacity utilization; price setting; local projections; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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